Russell warns against tax changes

Russell Investments has come out strongly in opposition to the investment tax changes Finance Minister Michael Cullen outlined in his recent budget.

Wednesday, June 22nd 2005, 6:54AM

Russell’s opposition comes on the eve of the release of the government’s latest discussion paper on proposed changes to the way collective investment vehicles are taxed.

The paper is due for release early next week. In his Budget Cullen moved away from what Craig Stobo proposed in his report last year and suggested that a modified capital tax gains regime be used for investments in offshore collective investment vehicles. Stobo had suggested that a risk-free rate of return method be used for this group of investments.

“In our view, the Budget's recommendations should be rejected,” Russell Investments Australasian director of consulting practice Craig Ansley says.

“At the very least, they fail to meet the Stobo report objectives. Furthermore, they produce no offsetting benefits to the Government, in that the two proposed changes in law are 'revenue neutral'.

“Neither do they have the potential to improve the New Zealand economy by encouraging greater domestic investment, as hedging offshore investments achieves the same result.”

Ansley says the budget proposals fail to meet the three objectives the government gave Stobo when he was commissioned to write last year’s report.

He says these objectives “remain a statement of the government’s intentions.” Instead of going down the comparative value route of taxing funds, the objectives could be met by tweaking the current system rather than changing the basic structure of the tax laws.

Russell Investments suggests:

Inconsistency between direct investment and investment through collective investment vehicles (CIVs). Allow CIVs to invest in equities, both domestic and offshore, using long-term buy-and-hold strategies, without incurring capital gains tax.
Black list restriction of investment choice. Extend the grey list for direct equity investments to include most (possibly all) countries. (However, the current black list rules would have to be retained for offshore CIVs.)
Taxing at the wrong marginal rate. Russell agree with the proposal to introduce a flow-through regime for taxing domestic CIV investments.

“Looked at in these terms, there is not much wrong with the current regime that could not be easily fixed,” Ansley says.

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